Debt has once again become a matter of debate among the presidential hopefuls. Indonesia’s rating has risen from stable to positive.
PRESIDENTIAL candidate Megawati Soekarnoputri has promised that she will stop foreign debt because this has become a burden for the nation. She made this statement during the presidential debate held by the General Elections Commission (KPU), on Thursday evening last week. Because of its natural wealth, Indonesia should stop borrowing. In fact, with this wealth of natural resources, she went on to say, “Indonesia will be capable of repaying all of its foreign debt.”
This is not the only time that Megawati and her running partner, Prabowo Subianto, have spoken about debt. On several occasions during the campaign, this pair has always had a great deal to say about independence, and at the same time criticize the debt management policies of the Susilo Bambang Yudhoyono government. Prior to these two setting up their coalition, the matter of debt was also one of the campaign themes for both the Indonesian Democratic Party of Struggle (PDI-P) and the Gerindra Party. One of Prabowo’s eight action plans is the scheduled repayment of foreign debt.
Indonesia’s current burden of foreign debt is particularly onerous. As of March this year, total government debt stood at Rp1,700 trillion, made up Rp732 trillion in foreign debt and state bonds of Rp968 trillion. This is more than at the same time last year when the total stood at Rp1,636 trillion. Indonesia’s debt has also increased sharply from the situation in 2004 when Yudhoyono became President. At that time, government debt was Rp1,299 trillion. During the last five years, this has increased by Rp401 trillion, or a rise of almost 31 percent.
Rahmat Waluyanto, Director-General of Debt Management at the Department of Finance, explained that this increase in debt during the last five years originated from the issue of state bonds. In 2004, domestic debt was only Rp662 trillion, but by 2009 this had already reached Rp968 trillion. On the other hand however, the US dollar-denominated domestic debt actually dropped from US$68.6 billion to US$63.2 billion. “In rupiah, there has certainly been an upward indication because the exchange value of the rupiah has weakened against the dollar and the Yen,” he said.
Rahmat went on to say that when viewed from the ratio of debt to GDP, a sharp reduction was also to be seen. Five years ago, Indonesia’s debt was still 57 percent, but now this has already dropped to only 32 percent. In addition, the composition of foreign debt against total debt has already changed greatly. In 2004, Indonesia’s foreign debt was still 49 percent of total debt, but now this proportion is only 43 percent. “Our debt has risen, but our domestic product has also grown larger,” said Rahmat.
This drop in foreign debt, according to Rahmat, happened after the government started in 2004 to set negative budgetary policies. What this meant was that the repayment of foreign debt was always larger compared to taking out new debts. This year, for example, it is planned that new debts will only amount to Rp57.6 trillion, while on the other hand debt repayment installment amount to Rp72.1 trillion. This is one reason why Indonesia’s foreign debt has been inclined to fall during the last five years.
Rahmat stated that up until now the government still needs foreign debt to cover the budget deficit, partially to repay project loans. Of course, apparently, there are preconditions that have to be fully met, including there not being allowed to be any political interests behind these loans, cheap costs, minimal risks, and long tenures. “Now it is also not like in the past, many loans do not have commitment fees, up-front fees,” he said. And even if there are, the amounts are small, in the range of between 0.15 and 0.25 percent.
During a crisis situation, budgetary deficits certainly do jump. In the 2009 State Budget, for example, the deficit was only budgeted at Rp51.3 trillion (1 percent of GDP). However, after several stimulus fiscal factors are introduced, the deficit swells up to Rp139.5 trillion (2.5 percent). Economist Raden Pardede stated, that in order to face up to the crisis, the government initiated a sort of counter-cyclical policy. The form of this is the flow of stimulus, and not that healthy.
Bank Danamon economist, Anton Gunawan, provided a parable regarding the matter of this debt. It is like a young bridegroom, whose financial situation is still inadequate, so loans are certainly required in order to buy needed household goods, including a home and a car. “What is important is that he has the ability to be able to repay the debt,” he said. It is also important that there is sufficient sustainability so that there are no problems in the future. “It’s the same with a country. The way of thinking is not that much different.”
Anton also pointed out the importance of making use of debt properly, so as to increase prosperity or income calculations. And this is usually reflected in the level of production, usually known as GDP. “It’s also like a company, the richer that it becomes, usually this means greater debt requirement,” said Anton. While the ability to repay debt increases, he said, “We need not have any allergies as regards debt.”
However, economist Iman Sugema still views debt as a burden. He still puts the spotlight on foreign debt that always causes problems for Indonesia. Iman cited the issuing of the State Decree on Investment and the State Decree on Oil & Gas. He considered that these two state decrees clearly indicate that the government cannot take advantage of too much foreign debt. “Where is sovereignty located within our economic policies,” he said.
More than this, he also said he was doubtful as regards the effectivity of this debt in motivating the domestic economy. The results of a study by the National Development Planning Board (Bappenas), Iman quoted, indicated that 85 percent of foreign debt originated from Japan. This in fact included a great deal, including consultancy services or purchase of goods which could actually be supplied domestically. “Only the Asian Development Bank is small, around 12.5 percent,” said this lecturer at the Bogor Institute of Agriculture.
Iman also asked that the government demand an interest cut from the World Bank amounting to 30 percent. He quoted the review results of the World Bank itself that 30 percent of its debt leaked to Indonesia. A similar signal was once made by the late senior economist Sumitro Djojohadikusumo. “The government must push for a haircut from the World Bank as regards this filthy debt,” he said. He referred to the Philippines, which was able to obtain a debt discount during the Ferdinand Marcos regime.
However, according to Rahmat, the request for a haircut must be considered carefully because the risks are not small. Usually, this sort of request triggers market reactions, including reductions in credit ratings. This is what happened when Indonesia put forward rescheduling requests to the Paris Club (2000) and to the London Club (2002). Indonesia’s ratings—S&P’s—at that time immediately went into freefall, down to Selective Default. As ratings dropped, the cost of funds also went up. In the end, if Indonesia insisted on issuing promissory notes, costs could become more expensive. “Recovery required a great deal of time. Only by 2004 did we return to level B,” he said.
Because of this, said Rahmat, the government was more inclined to reduce debt in stages. If this negative withdrawal program was successful, foreign debt that fell due would drop to below Rp50 trillion in 2016, from the current position of around Rp64 trillion. In addition, debt reduction was carried out through debt swap with the German and Italian governments, among others. In this way, Indonesia was able to avoid falling in the debt trap.
Rahmat also guaranteed that Indonesia’s debt management was already transparent. He referred to the results of the audit by the Supreme Audit Agency (BPK) for the government’s 2008 financial report. The debt management item received a proper opinion without exception grading in the report. Indonesia also received a present from Moody’s, as Indonesia’s rating outlook went up from stable to positive. What this means is that Indonesia is considered to have better prospects than its neighboring countries.
M. Taufiqurohman and Retno Sulistyowati
Government Debt (Rp trillions)
| | Government Commercial
Paper | Foreign Debt |
| 1997 | - | 238 |
| 1998 | 100 | 453 |
| 1999 | 502 | 438 |
| 2000 | 652 | 583 |
| 2001 | 661 | 613 |
| 2002 | 655 | 570 |
| 2003 | 649 | 583 |
| 2004 | 662 | 637 |
| 2005 | 693 | 620 |
| 2006 | 743 | 559 |
| 2007* | 803 | 586 |
| 2008* | 906 | 730 |
| 2009* | 968 | 732 |
*Tentative number
**Tentative number per March 2009
SOURCES: FINANCE DEPARTMENT AND BPS.
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